Net capital outflow

Net capital outflows (NCOs, also called net foreign investment) make reference to the difference between the acquisition of foreign assetsby domestic residents and the acquisition of domestic assets by non-residents. Net capital outflows takes two forms: foreign direct investment, and portfolio investment. Foreign direct investment implies actively managing the asset or the interest bought, while portfolio investment requires no role at all in management.

An open economy can therefore buy and sell assets in the financial markets, generating flows of capital.

When the net capital outflow is positive, domestic residents are buying more foreign assets than foreigners are purchasing domestic assets. When it’s negative, foreigners are purchasing more domestic assets than residents are purchasing foreign assets.

Imbalances in the net capital outflow (NCO) are associated with imbalances in the trade balance (or net exports, NX), following the identity NCO = NX. Each exchange that affects the net capital outflow, also affects net exports in the same amount. For instance, if an economy is running a trade deficit, it must be financing the net purchase of goods and services by selling assets abroad. If it’s running a trade surplus, the excess in foreign currency it receives is being used to buy assets from abroad.